Last week was a continuation of markets cautiously venturing further into a risk-on environment with the S&P 500 and MSCI World both up around a half percent and US 10-year Treasury yields moving 7 basis points higher, following the 9 basis point move the previous week. One driving factor was reassurances out of the ECB meeting which, along with leaving rates unchanged, signaled favourable conditions for the forthcoming round of TLTROs in September. Another factor was, of course, the further extension of the Brexit deadline: which prevented a hard Brexit on Friday just gone but will prolong uncertainty without giving much time for a public vote on either the deal or a new Government. With this still short lifeline given, Parliament have now changed gear to reach a compromise: agreeing to recess for a couple of weeks over Easter. Some discussions remain ongoing but the spluttering and stalling and persistent market concerns have been evident in the FX markets: where sterling has remained somewhat range-bound despite the real and imminent no-deal scenario being averted. Perhaps some are balancing the deal positives with potential political negatives with the latest poll data adding to concerns of a Corbyn government within the year.
Other growth-positive-news out of last week included household focused stimulus measures out of Beijing including lowering VAT and income tax to boost consumption; also the Caixin manufacturing PMI edged back into expansionary territory after couple of months contracting. Furthermore, another week has gone by and so we are empirically a week closer to the long-awaited US-China (partial) trade deal. But further sticking-points came to light last week and, alongside their trade dispute with China, the US also announced potential customs tariffs on EU exports as the EU eyes tariffs on Boeing. With such protectionism adding to the general secular slowing of growth and political upsets it’s not at all surprising that the IMF again cut global growth forecasts from 3.5% to just 3.3%.
The most notable market event was Saudi Aramco’s maiden issuance, which ended up coming to market at lower spreads than the sovereign: the 10-year tranche came in at just 105 basis points above US Treasuries (versus 117 basis points for Saudi government bonds) and total issuance across five tranches increased to $12bn, above the originally planned $10bn. The markets were clearly attracted to such yields from a highly rated and highly profitable entity versus the broader universe. Our value monitors put the issuance at 1.3 notches cheap versus a typical A1 rated bond, but still around a half-notch premium versus the sovereign to be a part of this historical debut. The curve has since widened with all tranches trading a few basis points higher than at issuance.
Outside of it being the start of another earnings season (with financials in focus this week) data for this week looks set for a slow start but with UK unemployment, German ZEW economic sentiment, Eurozone construction output and US industrial production all out on Tuesday. On Wednesday we have trade balance and industrial production data from Japan; GDP, industrial production and retail sales from China; inflation data for the UK; inflation and trade balance figures out of the Eurozone; and US trade balance, wholesale inventories and the Fed Beige Book. Thursday sees the release of flash PMIs across Eurozone and the US, PPI in Germany and retail sales in the US and UK. Japan CPI and US housing starts data are released on Friday.